If you’re approaching retirement (or you’re already there), you may have a portion of your portfolio invested in bonds. These safe financial vehicles promise that they will pay you a set amount of interest over a certain period of time. This reliability can be comforting, knowing that you can count on incoming cash flow. In reality, though, bonds can actually be down when they are up, and vice versa. With that in mind, are bond values really as secure as people think?
How the Value of a Bond Can Change Over Time
When an investor purchases a bond, they are actually loaning money to a company, a government, or a municipality. In return for that, a promise is made to the investor, and a certain amount of interest is paid out on a regular basis.
Typically, the longer the bond’s term, the higher the interest rate will be, and vice versa. But the interest rate that a bond offers is not the only component of its value. In fact, the actual value of a bond can fluctuate just as often as stock values move up and down in the market.
As an example, if an investor uses $100,000 to purchase a 20-year bond that offers a 4% interest rate, the underlying entity will pay out a set amount of interest, and at the end of the 20-year period, the investor will receive their principal back.
So far, so good.
What many people don’t realize, though, is that investors don’t always hold bonds to their full term, or maturity date. And if the investor goes to sell their bond – and interest rates have changed since the date of their original purchase – the value of that bond will likely change, too.
For instance, if interest rates on new bonds are now higher than the 4% in the example above, the value of the bond will be less than its initial $100,000 purchase price. Alternatively, if interest rates are now lower, the value of the bond may be more.
As a retiree, then, it can be somewhat tricky to rely on the value of bonds throughout the entire length of retirement – particularly if your retirement lasts for 20 or more years (which is becoming much more common today).
This is why it can pay to consider other financial vehicles for generating retirement income. One possible option is an annuity. These products are designed for paying out a regular income stream either for a set time period (such as ten or twenty years), or even for the remainder of the recipient’s lifetime – no matter how long that may be. The certainty that an annuity offers can allow you to focus on other things as versus wondering how much your investments – and your future income stream – will be worth down the road.
How to Generate Retirement Income – Whether the Market is Up, Down or Sideways
When you retire, how would you prefer to spend your time – doing activities you enjoy with the people you love, knowing that income will arrive each and every month, or instead pouring over endless word problems and trying to figure out whether or not your money is worth as much as it was the month prior?
If you want to ensure that you can count on a regular income for life, we can help you to put viable cash flow generating strategies in place. So, feel free to contact us for more information, or even if you just have a question or concern. We can be reached online by going to our secure Contact Form here, or you can call us directly, toll-free at (888) 440-2468. We look forward to hearing from you.